Non-life and Health Insurance

Transcription

1 Non-life and Health Insurance

2 The Capital Market, Insurance and Saving Division Contents 1. Introduction General Review of the Industry... 6 A. General 6 B. Market concentration Characteristics and Results of Activities A. Profitability B. Reserves C. Commissions D. General and administrative expenses Business Results in Health Insurance A. General 37 B. The sickness and hospitalization insurance line activities in the health field being reported under non-life insurance C. Distribution by sub-lines activities in the health field being reported under non-life insurance and under life insurance Stability and Assessment of Risks A. Quality of the assets B. Reinsurance C. Loss ratio D. Liquidity risks E. Insurance Risk Text Box A The Reform in the Compulsory Vehicle Insurance Line List of Tables Table D-1 Number of Insurance Companies Operating in Non-Life Insurance Lines... 6 Table D-2 Gross Premiums by Non-Life Insurance Lines, Table D-3 Premiums for Non-Life Insurance by Insurance Groups Table D-4 Market Share of Premiums in the Various Insurance Lines by Insurance Groups Table D-5 Results of the Market Concentration Indices in Non-Life I nsurance Lines, Table D-6 Profit Rates from Gross Premiums in Various Insurance Lines Table D-7 Profits from Non-Life Insurance Business by Insurance Companies Table D-8 Market Share by Profits in Non-Life Insurance Lines by Insurance Groups Table D-9 Use of Parameters in Setting "Compulsory Vehicle Insurance" Rates for Private Vehicles... 28

3 Non-life and Health Insurance Table D-10 Minimum and Maximum Rates in the Privately-Owned Private Vehicle Market Table D-11 Ratio of Income from Investments in Non-Life Insurance Reserves Table D-12 Ratio of Insurance Agents> Commissions to Gross Premiums Table D-13 General and Administrative Expenses in Non-Life Insurance Table D-14 Data on Collective Insurance for Table D-15 Data on Private Insurance for Table D-16 Gross Premiums by Health Insurance Sub-lines, Table D-17 Gross Premiums in Insurance Companies by Private Health Insurance Sub-lines in Table D-18 Gross Premiums in Insurance Companies by Collective Health Insurance Sub-lines in Table D-19 Ratio of Securities (excluding in Held Companies) to Total Assets and Debit Balances Table D-20 Ratio of Fixed Assets, Receivables, Investment in Held Companies to Total Assets and Debit Balances Table D-21 Ratio of Retained Premiums (After Payment to Reinsurers) to Gross Premiums in Table D-22 Gross Loss Ratio by Lines and Companies, List of Charts Chart D-1 Distribution of Gross Premiums by Non-Life Insurance Lines in Chart D-2 Distribution of Gross Premiums by Companies in Chart D-3 Ratio of Income from Investments to Investment Assets in Non-Life Insurance Chart D-4 Ratio of Income from Investments to Net Premiums in Non-Life Insurance Chart D-5 Profitability of Non-Life Insurance Lines, Chart D-6 Gross Premiums in Non-Life Insurance Business versus Profits from Non-Life Insurance Business Chart D-7 Profits by Main Non-Life Insurance Lines, Chart D-8 Market Share Comparison - Premiums versus Profits Chart D-9 Market Share Comparison - Premiums versus Profitsin Non-Life Insurance Business Chart D-10 Cumulative Change in the Average Compulsory Vehicle Insurance Rate for Private Vehicles Chart D-11 Ratio of General and Administrative Expenses to Net Premiums Chart D-12 Business Results in the"sickness and Hospitalization" Line,

4 The Capital Market, Insurance and Saving Division Chart D-13 Distribution of Gross Premiums by Companies in the "Sickness and Hospitalization" Line in Chart D-14 Distribution of Gross Premiums by Companies in the "Sickness and Hospitalization" Line, Chart D-15 Distribution of Gross Premiums by Health Insurance Sub-lines in Chart D-16 Loss Ratio in Collective Insurance by Main Health Insurance Sub-lines in Chart D-17 Loss Ratio in Private Insurance by Main Health Insurance Sub-lines in Chart D-18 Ratio of Direct Commissions to Gross Premiums by Main Health Insurance Sub-Lines in Chart D-19 Total Gross Premiums by Health Insurance Sub-Lines, Chart D-20 Private Insurance - Distribution of Gross Premiums in the "Medical Expenses" Sub-Line by Insurance Companies in Chart D-21 Private Insurance - Distribution of Gross Premiums in the "Medical Expenses" Sub-Line by Insurance Companies in Chart D-22 Private Insurance - Distribution of Gross Premiums in the "Critical Illnesses" Sub-line by Insurance Companies in Chart D-23 Private Insurance - Distribution of Gross Premiums in the "Critical Illnesses" Sub-line by Insurance Companies in Chart D-24 Private Insurance - Distribution of Gross Premiums in the "Long-term Care" Sub-line by Insurance Companies in Chart D-25 Private Insurance - Distribution of Gross Premiums in the "Long-term Care" Sub-line by Insurance Companies in Chart D-26 Collective Insurance - Distribution of Gross Premiums in the "Medical Expenses" Sub-line by Insurance Companies in Chart D-27 Collective Insurance - Distribution of Gross Premiums in the "Medical Expenses" Sub-Line by Insurance Companies in Chart D-28 Collective Insurance - Distribution of Gross Premiums in the "Long-term Care" Sub-line by Insurance Companies in Chart D-29 Collective Insurance - Distribution of Gross Premiums n the "Long-term Care" Sub-line by Insurance Companies in Chart D-30 Ratio of Negotiable Securities to Total Assets and Debit Balances Chart D-31 Ratio of Retained Premiums to Gross Premiums Chart D-32 Ratio of Cash/Cash Equivalents and Negotiable Assets to Current Liabilities Chart D-33 Ratio of Reserves to Average Claims in Retention

5 Non-life and Health Insurance 1. Introduction The Non-Life Insurance Department in the Capital Market, Insurance and Savings Division is responsible for policy-making, regulation and ongoing supervision of all lines of the insurance industry, with the exception of life insurance. The objective of the Department s activities is to ensure a proper market structure, based on fair competition. The activity in non-life insurance is divided into four main fields: 1. Property insurance vehicle property, property loss, comprehensive residential, comprehensive business premises, engineering insurance, etc.; 2. Liability Insurance vehicle compulsory, third party, professional liability, employers liability, etc.; 3. Health insurance sickness and hospitalization and personal accident; 4. Financial insurance credit insurance, guarantees, etc. An analysis of the financial results in the non-life insurance lines shows a slight increase in the volume of premiums that companies collected in However, after three consecutive years during which a rise in profits was recorded, this year, profits have dropped some 13%. The market concentration indices indicate a decrease in concentration in nearly all lines. Notable is the decrease in the market concentration of the compulsory vehicle insurance line. The reason for this is apparently the reform in the compulsory vehicle insurance line, which has led to more lively competition.

6 The Capital Market, Insurance and Saving Division 2. General Review of the Industry A. General More than twenty insurance companies are engaged in the various non-life insurance lines. A majority of the premiums collected during 2004, as well as a majority of the profits, are concentrated in the vehicle insurance lines (compulsory and property). As Table D-1 shows, most insurance companies show some activity in these lines, while fewer insurance companies operate in lines generating a lower volume of premiums and profits. Table D-1 Number of Insurance Companies Operating in Non-Life Insurance Lines Personal accident 17 Vehicle compulsory 16 Vehicle property 16 Sickness and hospitalization 16 Comprehensive residential 15 Employers liability 15 Engineering insurance 14 Property loss 12 Cargo in transit 11 Comprehensive business premises 10 Aircraft and seacraft 10 Credit insurance 3 The duration of the life of the policy and the duration of the claims clarification process are the main characteristics that differentiate the various insurance lines. Thus, for example, property insurance and financial insurance policies are issued, for the most part, for a relatively short period (up to one year), while the claims in respect thereof are clarified shortly after the policies are issued. The various types of liability insurance policies are usually issued for one year, but the claims clarification process is protracted, since clarifying liability is a relatively complex process and the prescription period for a liability claim is long. Health insurance policies are issued for various periods, ranging from a few months to the entire lifetime of the insured, while claims are clarified, for the most part, within a short

7 Non-life and Health Insurance time. Due to these distinct variables, the financial results in the various insurance lines must be examined individually. Table D-2 presents the gross premiums in the various non-life insurance lines, as well as the rate of change in each of the lines for the period 2000 through An examination of the business results in the non-life insurance lines shows that the total premiums in the non-life insurance lines reached NIS 17,552 million in 2004; i.e., growth of about 0.5% over the previous year. Although there was no significant change in the total premiums collected in 2004 compared to 2003, by examining the particular figures for the various lines, one can see that some lines show substantial change compared to the previous year. The most evident change is the increase in the premiums collected in the various liability insurance lines and in the sickness and hospitalization insurance line: this is the fourth consecutive year that the premium collections have risen in these lines. Also notable is the drop in the gross premiums collected in the property loss and third-party insurance lines. In the compulsory vehicle insurance line, there was nearly a 2% decrease in total premiums collected in 2004 compared to When taking into account the fact that, this year, the number of vehicles has increased by approximately 2.8%, then this 2% decrease in total premiums means that the average premium decreased by approximately 5%. This decrease is explained, inter alia, by the improved availability of information to the public, which was obtained thanks to the implementation of the "compulsory vehicle insurance premiums calculator" by the Commissioner of Insurance. This calculator enables the public to compare the compulsory vehicle insurance rates offered by the different insurance companies. The improved availability of information has also led to more lively competition in the compulsory vehicle insurance line As also described on page 28.

8 The Capital Market, Insurance and Saving Division Table D-2 Gross Premiums by Non-Life Insurance Lines, (NIS millions, percent) Rate of change versus 2003 Distribution by Lines Vehicle Property 4,556 4,953 5,005 4,953 5, % 29.3% Vehicle Compulsory Sickness and Hospitalization Comprehensive Residential 3,928 4,048 4,221 4,222 4, % 23.6% 1,103 1,263 1,460 1,607 1, % 10.3% 1,004 1,091 1,310 1,340 1, % 7.8% Other Liabilities , % 6.5% Property Loss 913 1,183 1,557 1,417 1, % 6.2% Property Other ,132 1, % 5.9% Other % 4.3% Third Party % 3.0% Employers' Liability % 1.8% Personal Accident % 1.3% TOTAL 14,152 15,599 17,221 17,467 17, % 100.0% Division, on the basis of the companies consolidated financial statements. Chart D-1 presents the distribution of gross premiums by the various non-life insurance lines in Approximately 53% of the total insurance premiums originated in the vehicle insurance lines (compulsory and property), in which no significant change was recorded compared to The market shares of most of the other insurance lines also remained without change.

9 Non-life and Health Insurance The insurance lines showing a relatively significant change in total insurance premiums are the minor lines. Thus, for example, the most significant change occurred in property loss insurance. The market share of this line dropped from 8% in to 6% in Chart D-1 Distribution of Gross Premiums by Non-Life Insurance Lines in 2004 Employers Liability 1.8% Third Party 3.0% Other 4.3% Property Other 5.9% Property Loss 6.2% Other Liabilities 6.5% Personal Accident 1.3% Vehicle Property 29.3% Comprehensive Residential 7.8% Sickness and Hospitalization 10.3% Vehicle Compulsory 23.6% Division, on the basis of the companies consolidated financial statements. Table D-3 presents the total gross premiums in non-life insurance by insurance groups and the market shares of those groups. As is also shown in Chart D-2, this year, the five major groups collected about 70% of all premiums in the non-life insurance lines. Menorah, the smallest of them, increased its market share this year to nearly 9%. On the other hand, the four major groups collected about 61% of the total premiums this year in the non-life insurance lines which is about a 2% drop compared to This decline, which is also reflected in the market shares of the major insurance groups (concurrently with the increase in the shares of most of the small companies), attests to the heightened competitiveness in the non-life insurance market. The decrease originates mainly in the Clal and Migdal groups. The volume of premiums that these groups collected in 2004 diminished considerably compared to the 2. The data for 2003 are taken from the Annual Report of the Commissioner of the Capital Market, Insurance and Savings for 2003.

10 The Capital Market, Insurance and Saving Division previous year (together, the groups collected about NIS 290 million less than in 2003). This downtrend in the major insurance companies market shares is also evident in the results of the market concentration indices, which are given below (Table D-5). Table D-3 Premiums for Non-Life Insurance by Insurance Groups (NIS millions, percent) Company Market Share (by Rate of Change Premiums Premiums) in Premiums Clal Group 3,582 3,605 3, % 20.6% 19.9% -2.8% -2.2% Harel Group 3,200 3,349 3, % 19.1% 19.1% 0.5% 5.2% Phoenix Group 2,420 2,331 2, % 13.3% 12.2% -8.0% -11.3% Migdal Group 1,769 1,748 1, % 10.0% 9.9% -0.4% -1.6% Menorah 1,175 1,360 1, % 7.8% 8.9% 14.8% 32.8% Ayalon 1,048 1,173 1, % 6.7% 6.1% -8.1% 2.9% I.L.D. Group % 4.3% 4.7% 7.7% 36.4% Eliahu % 4.8% 4.6% -3.8% 5.9% IDI Direct % 3.8% 4.0% 5.2% 27.8% AIG % 1.9% 2.2% 15.1% 36.3% Agricultural Insurance % 2.0% 2.1% 4.3% 7.3% Shirbit % 1.7% 2.0% 18.7% 69.0% Shomera % 1.1% 1.4% 33.3% 149.5% Natural Disasters Fund % 0.8% 0.9% 7.6% 11.1% Ezer % 0.4% 0.5% 13.2% 16.7% Foreign Trade % 0.3% 0.3% -11.9% -10.8% Inbal % 0.1% 0.1% 37.0% 126.5% Avner Karnit TOTAL 17,237 17,497 17, % 100.0% 100.0% 0.5% 2.0% Division, on the basis of the companies non-consolidated financial statements. As Chart D-2 shows, the market share of the Clal Group the largest group in the non-life insurance sector reached 19.9% (compared to 20.6% in 2003). Despite the fact that, in general, significant changes in the companies market shares were not recorded this year, Menorah increased its market share by 1.1%, and now accounts for about 9% of the total 10

11 Non-life and Health Insurance premiums in the non-life insurance lines. The Phoenix Group is also notable: its market share decreased by 1.1% and stands at 12.2% this year, compared to 13.3% in Chart D-2 Distribution of Gross Premiums by Companies in Non-Life Insurance Lines in 2004 I.L.D. 4.7% Menorah 8.9% Ayalon 6.1% Eliahu 4.6% Direct Insurance 4.0% Migdal Group 9.9% Other 3.9% AIG 2.2% Phoenix Group 12.2% Agricultural 2.1% Harel Group 19.1% Clal Group 19.9% Government Companies 1.3% Division, on the basis of the companies consolidated financial statements. 1. The Clal Group Clal, Arieh and Clal Credit Insurance; the "Harel Group" Harel and Dikla; the Phoenix Group Phoenix and Hadar; the Migdal Group Migdal and Hamagen. 2. "Others" Shirbit, Shomera and Ezer. Upon examination of the volume of premiums in the non-life insurance lines, it can be seen that vehicle property insurance is the largest line. Approximately 29% of the total premiums in the market are collected in this line. As Table D-4 shows, the Clal, Harel and Phoenix insurance groups each hold approximately 15% of the total premiums in this line. The insurance line with the second highest volume is the compulsory vehicle insurance line. About 24% of all premiums in the market are collected in this line. The Clal Group commands 18% of this market, while the Harel, Phoenix, Migdal and Menorah groups each hold about 10% of the market. The Clal Group commands a market share that exceeds 50% of the residential insurance lines being sold through mortgage banks. The reason for this might be that the company serves as the primary insurer (the leader) at some of the major mortgage banks. Ten percent of the total premiums being collected in non-life insurance are being collected in the sickness and hospitalization insurance line. The Harel Group stands out: it is leading in this insurance line, and collected approximately 50% of the premiums in this line this year. 11

12 The Capital Market, Insurance and Saving Division Table D-4 Market Share of Premiums in the Various Insurance Lines by Insurance Groups (percent) Property Loss Comprehensive Residential Mortgage Banks Comprehensive Business Premises Vehicle Compulsory Vehicle Property Employers> Liability Other Liability Lines Personal Accident Sickness and Hospitalization Aircraft and seacraft Cargo in Transit Engineering Insurance Credit Insurance Other Risks TOTAL Clal Group 41.6% 19.6% 52.3% 4.0% 18.0% 15.3% 26.1% 21.5% 28.6% 15.7% 6.6% 27.6% 33.4% 64.2% 21.7% 20.1% Harel Group 23.6% 16.2% 20.1% 0.0% 10.6% 16.2% 14.6% 31.7% 25.3% 49.5% 7.3% 10.6% 8.1% 0.0% 3.3% 19.3% Phoenix Group 7.4% 16.3% 2.3% 21.4% 10.5% 14.4% 15.9% 10.6% 12.5% 13.1% 18.2% 22.9% 23.6% 0.0% 3.4% 12.3% Migdal Group 0.8% 10.5% 13.2% 54.1% 9.7% 6.6% 18.3% 10.0% 5.0% 10.5% 18.4% 10.9% 5.5% 0.0% 14.8% 10.0% Menorah 4.3% 12.4% 7.8% 12.7% 9.6% 9.4% 8.1% 9.1% 4.0% 9.4% 43.3% 16.5% 11.8% 0.0% 0.8% 9.0% Ayalon 7.6% 6.5% 0.0% 0.0% 8.5% 7.2% 7.0% 7.7% 2.9% 1.5% 0.0% 1.1% 9.3% 0.0% 0.5% 6.2% I.L.D. Group 1.1% 4.2% 0.0% 2.2% 8.4% 6.2% 1.3% 1.0% 0.6% 0.0% 0.0% 6.1% 2.1% 33.5% 6.9% 4.7% Eliahu 3.9% 3.2% 0.1% 0.0% 8.5% 7.2% 2.0% 1.0% 0.7% 0.0% 0.0% 4.2% 0.1% 0.0% 0.1% 4.7% IDI Direct 0.0% 5.3% 4.3% 0.6% 6.4% 7.1% 0.2% 0.1% 0.0% 0.1% 0.0% 0.0% 0.0% 0.0% 0.0% 4.0% AIG 0.9% 2.9% 0.0% 0.0% 2.6% 2.9% 0.8% 3.5% 16.1% 0.0% 0.0% 0.0% 0.6% 0.0% 0.1% 2.2% Agricultural 8.8% 0.0% 0.0% 0.0% 1.9% 1.9% 5.0% 3.1% 0.5% 0.0% 0.0% 0.0% 4.9% 2.4% 1.1% 2.1% Shirbit 0.0% 1.4% 0.0% 3.3% 2.6% 3.6% 0.0% 0.5% 3.6% 0.1% 6.1% 0.0% 0.6% 0.0% 2.3% 2.1% Shomera 0.0% 1.7% 0.0% 1.8% 2.6% 2.1% 0.7% 0.2% 0.2% 0.1% 0.0% 0.0% 0.0% 0.0% 0.5% 1.4% Natural Disasters Fund 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 21.8% 0.9% Ezer 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 12.6% 0.5% Foreign Trade Risks 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 7.3% 0.3% Inbal 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 2.7% 0.1% Total for all Companies 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% Total, excluding Avner and Karnit 1,150,920 1,005, , ,696 3,948,483 5,139, ,997 1,668, ,880 1,838,591 31, , ,791 52, ,923 17,393,307 Avner + Karnit , ,807 TOTAL INCLUDING AVNER & KARNIT 1,150,920 1,005, , ,696 4,140,290 5,139, ,997 1,668, ,880 1,838,591 31, , ,791 52, ,923 17,585,114 Division, on the basis of the companies nonconsolidated financial statements. 12

13 Non-life and Health Insurance B. Market concentration The market concentration indices help estimate the level of competition in specific market sectors. The assumption is that, usually the higher the level of concentration, the lower the level of competitiveness: the incentive to improve efficiency diminishes, while the ability of commercial bodies to dictate the price of the product or service increases. Table D-5 presents the results of the market concentration indices in the main non-life insurance lines for The higher the indices, the higher the level of concentration. 1. The Herfindahl-Hirschman Index (HHI) is calculated by summing the squares of all the insurance companies market shares. The market share for each company is calculated as the ratio of gross insurance premiums collected by the company and the total insurance premiums in the line. The HHI ranges between 0 and 1. The closer the number obtained is to 1, the more concentrated the line. 2. The Concentration Ratio 3 Index (CR3) totals the market shares of the three largest insurance companies or groups in the line. The higher the percentage obtained, the more concentrated the line. 3. The Concentration Ratio 5 Index (CR5) totals the market shares of the five largest insurance companies or groups in the line. As can be seen, all these indices show that the most concentrated lines are sickness and hospitalization, employers liability and property loss. The least concentrated lines are the vehicle lines (compulsory and property). Compared to 2003, the market concentration has decreased in all lines, with the exception of sickness and hospitalization. The most evident decrease in concentration is in the compulsory vehicle insurance line this is the fourth year it has shown a decrease (apparently as a result of the reform instituted in this line, which led to heightened competition) and in the comprehensive residential insurance line, for this, the third year. 13

14 The Capital Market, Insurance and Saving Division Table D-5 Results of the Market Concentration Indices in Non-Life Insurance Lines, Herfindahl- Hirschman CR3 CR Vehicle Compulsory % 39.1% 62.8% 58.4% Vehicle Property % 45.9% 64.0% 62.5% Comprehensive Residential Sickness & Hospitalization % 52.0% 79.6% 74.8% % 77.9% 98.3% 98.2% Property Loss % 74.0% 89.5% 89.0% Employers> Liability % 60.3% 82.4% 83.0% Division, on the basis of the companies consolidated financial statements. 14

15 Non-life and Health Insurance 3. Characteristics and Results of Activities A. Profitability The method of recording results in financial statements, as well as the method of calculating reserves, vary from one insurance line to another, and these varying methods of calculating and recording reserves, of course, also affect the profits of the insurance companies. In the various property insurance lines, income from premiums is recorded on the policy issue date: sums received in respect of the period subsequent to the date of the financial statements are allocated to a "reserve for uncancelled risks." The insurance companies invest the monies they receive and reap yields from these investments. The income from investments is credited immediately to the Statement of Income. In the various liability insurance lines, the method of recording premiums is the same as that customary in the property insurance lines, however, here, the company cannot recognize profits immediately (due to the length of time required in order to clarify claims in the liability insurance lines). Most of the profits are allocated to a separate reserve for a period of three to five years until the claims in these lines are clarified fully. The profit retained in this separate reserve is comprised of income recorded from premiums, less expenses, claims paid and pending claims, plus the yield earned on the investment of the funds in the reserve. The profit is released and allocated to the Statement of Income only at the end of the period. It can be deduced from this that the profits (or losses) recorded in the Statement of Income for 2004 were mainly those that accrued in the property insurance lines in respect of 2004, as well as the profits (or losses) in the liability insurance lines in respect of the 2001 underwriting year and the years preceding Chart D-3 and Chart D-4 present various indices for examining the yields of the insurance companies. As expected, the yield varies according to the fluctuations in the capital market. Thus, record yields were recorded in 2003, while in 2004, the yields diminished (but are still quite good. For example, the Tel-Aviv 100 Index rose in 2003 by more than 60%, while in 2004 it rose by about 17%). 15

16 The Capital Market, Insurance and Saving Division Chart D-3 Ratio of Income from Investments to Investment Assets in Non-Life Insurance 12.0% 10.0% 8.0% 6.0% 4.0% 2.0% 0.0% -2.0% Division, on the basis of the companies consolidated financial statements. Chart D-4 Ratio of Income from Investments to Net Premiums in Non-Life Insurance 20.0% 15.0% 10.0% 5.0% 0.0% -5.0% Division, on the basis of the companies consolidated financial statements. 16

17 Non-life and Health Insurance Chart D-5 presents the profits (in NIS millions) in the non-life insurance lines for the years 1995 through After three consecutive years ( ) during which a rise in profits was recorded in the non-life insurance lines, this year, a decrease in profits of approximately 13% was recorded. The profits in 2004 totalled approximately NIS 1,902 million, compared to about NIS 2,197 million last year. Much of the profits in 2003 derived from profits from investments. This year, on the other hand, the profits from investments plummeted by tens of percentage points, which of course, was sufficient to cause a drop in the overall profit. The drop in the investment profits derives, inter alia, from the moderate rises in the capital market during 2004 compared to 2003 which had been a year of record yields in the Israeli capital market. Chart D-5 Profitability of Non-Life Insurance Lines, (NIS millions) 2,400 2,200 2,000 1,800 1,600 1,400 1,200 1, Division, on the basis of the companies consolidated financial statements. Chart D-6 presents the premiums versus the profits in the non-life insurance business. For most years, there is an evident correlation between the direction of the change in the total premiums and the direction of the change in the total profits in the non-life insurance lines. In 2004, in contrast to the correlation that had existed in previous years, the premiums rose (although slightly 0.5%), while, as stated, the overall profits fell by approximately 13%. The data on the premiums were affected this year mainly by the financial results of the Clal Group, the Phoenix Group and Menorah. The Clal and Phoenix groups recorded a decrease in their total premiums in 2004 of approximately NIS 100 million and NIS 185 million (respectively). Menorah, on the other hand, recorded an increase of NIS 200 million in the premiums it collected this year. 17

18 The Capital Market, Insurance and Saving Division The decrease in the total profits in the non-life insurance lines was affected mainly by the decrease in the profits of the Clal Group and the Phoenix Group. The Phoenix Group s profits plummeted this year by more than NIS 100 million and resulted in a loss. This sharp drop in profits is explained, inter alia, by a decrease in the premiums that the groups collected and by a decrease in the income from investments, which was characteristic of the entire market. As stated above, the main reason for the decrease in the income from investments is that the capital market rose only moderately in 2004 compared to The companies profits from investments decreased by about 35% in 2004 compared to their profits in 2003 (a decrease of more than NIS 1 billion). Chart D-6 Gross Premiums in Non-Life Insurance Business versus Profits from Non-Life Insurance Business (NIS milllions) 2,500 20,000 18,000 2,000 16,000 14,000 Profit 1,500 1,000 12,000 10,000 8,000 Premiums 6, ,000 2, Premiums Profit Division, on the basis of the companies consolidated financial statements. Chart D-7 presents the profits (in NIS millions) in the main non-life insurance lines during the years 2000 through This chart reflects a very high level of variance in the profitability of the non-life insurance lines, and shows that different lines yielded differing rates of profit over the years. The change in the profits among the various lines between 2004 and

19 Non-life and Health Insurance is substantial and reached tens of percentage points. By comparing the change in profits with the change in the premiums in the same line, one can see that there is not always a direct correlation between the two. Although the profits dropped in most lines, still, all lines presented in the chart are profitable. In all years presented in the chart, the compulsory vehicle insurance line is the most profitable, however, in 2004, the profit dropped by 12%, after a steady growth in profits during the preceding few years. This statistic also reflects the reform instituted in the compulsory vehicle insurance line, after it was opened to competition. It is also important to note that much of the profit in this line derives from income from investments of reserve funds. Other notable changes are the transition from loss to profit in the various liability insurance lines, and the growth in profits of about 40% in the vehicle property insurance line. Chart D-7 Profits by Main Non-Life Insurance Lines, (NIS millions) Vehicle Compulsory Sickness and Hospitalization Vehicle Property Property Loss Comprehensive Residential Various Liabilities (excluding Vehicle Compulsory) Division, on the basis of the companies consolidated financial statements. Table D-6 presents the profit rates from gross premiums in the non-life insurance lines from 2000 through This table shows that, except for the personal accident insurance line, all other lines presented were profitable in Table D-8 shows that most of the losses in the personal accident line derive from the losses of AIG and from the losses of the Clal Group, although most of the other insurance companies also recorded losses in this line. 19

20 The Capital Market, Insurance and Saving Division In the various liability insurance lines, a relatively high variance is evident. In the various types of property insurance, the profit rate from premiums has been more or less stable over the years. The comprehensive residential insurance line is the line with the highest profit to premiums ratio, which might be due to the lack of competition in this line. This lack of competitiveness enables the mortgage banks (which centralize most of the activity of this line) to collect high premiums. Table D-6 Profit Rates from Gross Premiums in Various Insurance Lines (percent) Comprehensive Residential 9.8% 8.5% 5.2% 8.6% 7.8% Property Other 5.0% 3.5% 6.2% 4.1% 7.1% Sickness and Hospitalization 6.3% 8.6% 3.9% 7.9% 5.0% Vehicle Property 0.9% 4.2% 5.1% 3.7% 4.9% Third Party 2.2% -1.5% -5.3% 10.2% 3.5% Property Loss 1.0% 2.4% 3.5% 4.8% 3.3% Personal Accident 2.7% -8.3% -4.9% 4.4% -9.6% TOTAL 3.2% 5.3% 6.0% 12.6% 10.8% Division, on the basis of the companies consolidated financial statements. Chart D-8 presents data on the percentage of insurance premiums collected by the various non-life insurance lines out of the total premiums in non-life insurance, as well as data on the profit rate in the various non-life insurance lines out of the total profits in non-life insurance for 2004 (including Avner and Karnit). As is quite evident, the most notable lines are the vehicle insurance lines (compulsory and property). The vehicle insurance lines share of the total premiums in the non-life insurance lines reached about 53%, while their share of the total profits reached about 76%. The compulsory vehicle insurance line achieved the highest profits of all lines and reached approximately 62% of all profits in the non-life insurance lines. The premiums in compulsory vehicle insurance reached approximately 24% of all gross premiums. As Table D-8 shows, the Clal Group achieved the highest profits in the compulsory vehicle insurance line, followed by Eliahu. In 2004, Eliahu earned almost the same as the Clal Group, and more than all other groups and companies. Despite the decrease 20

21 Non-life and Health Insurance in profits this year in the compulsory vehicle insurance line, its relative share of all profits in the various non-life insurance lines increased, due to the sharper drop in the profits of the other lines. In terms of volume of premiums, the largest line was the vehicle property insurance line, and this was the case for the vast majority of companies. The Harel Group collected approximately 15% of the premiums in this line (approximately NIS 830 million), followed by the Clal and Phoenix insurance groups. Chart D-8 Market Share Comparison - Premiums versus Profits 70% 60% 50% 40% 30% 20% 10% 0% -10% Vehicle Compulsory Vehicle Property Comprehensive Residential Sickness & Hospitalization Property Other Other Liabilities Employers' Liability Property Loss Third Party Personal Accident Market Share - Premiums Market Share - Profits Division, on the basis of the companies consolidated financial statements. Chart D-9 compares the companies, both on the basis of the premiums collected and on the basis the profits from the non-life insurance business. As a rule, to the extent that the company s share in the line s total profits is higher than its share in the total premiums, this indicates that the company is more efficient than the other companies. As the chart shows, the profits of the Harel Group, Eliahu, the Migdal Group, Ayalon and IDI Direct exceeded their shares in the premiums. Eliahu is the most notable: its market share of the profitability is nearly three times higher than its market share of the premiums that it collected in non-life insurance. A majority of Eliahu s profits originated in the compulsory 21

22 The Capital Market, Insurance and Saving Division vehicle insurance line: the company recorded profits in this line of more than NIS 130 million (the second most profitable line was vehicle property in which profits of about NIS 30 million were recorded). In 2004, Eliahu also showed high profits from investments (approximately NIS 110 million), which also contributed to the overall profits. On the other end of this spectrum, among the companies whose market shares of the profits were lower than their market shares of the premiums were Clal, Menorah, I.L.D. Insurance Company, AIG and Shirbit. The Phoenix Group should be noted in particular: despite its being one of the major players in the line, in 2004, the company recorded a loss of 1.4%, notwithstanding its investment profits of some NIS 160 million. Most of the Phoenix Group s losses were recorded in the sickness and hospitalization insurance line more than NIS 80 million and in the vehicle property insurance line about NIS 25 million. 30.0% Chart D-9 Market Share Comparison - Premiums versus Profits in Non-Life Insurance Business 25.0% 20.0% 15.0% 10.0% 5.0% 0.0% -5.0% Harel Group Clal Group Eliahu Migdal Group Ayalon IDI Direct Menorah I.L.D. Group AIG Shirbit Agricultural Insurance Shomera Foreign Trade Inbal Natural Disasters Fund Ezer Phoenix Group Market Share by Profits Market Share by Premiums Division, on the basis of the companies non-consolidated financial statements. 22

23 Non-life and Health Insurance Table D-7 presents details about the profits of the insurance companies and about the companies market shares in the non-life insurance lines, by profits. In 2004, the companies profits totalled about NIS 1,355 million excluding Avner, and about NIS 1,900 million including Avner. After a rise in profitability in 2003, this year, the profitability of the non-life insurance lines decreased by about 8%. Unlike in 2003, when nearly all companies showed a relatively high level of profits 2004 was characterized by a mixed trend in the level of profitability of all non-life insurance companies, both large and small. The Harel Group s profits rose by 7.5% compared to Today, this is the insurance group generating the highest profits of all insurance companies. Last year, the Clal Group was in first place in terms of volume of profits. This year, it lost about 25% of its profits compared to last year, and in 2004, its profits reached approximately NIS 263 million, i.e., about 13.8% of the total profits in the market. The Migdal Group and other companies, including Shirbit, Agricultural Insurance and IDI Direct also showed growth in profits this year. 23

24 The Capital Market, Insurance and Saving Division Table D-7 Profits from Non-Life Insurance Business by Insurance Companies (Non-consolidated Balance Sheet Data) (NIS thousands, percent) Profits from Non-Life Insurance Business (NIS thousands) Market Share (by Profit) Rate of Change in Profits Company Harel 39, , , % 15.3% 17.4% 4.3% 503.7% Dikla 53,871 75,145 88, % 5.1% 6.5% 17.3% 63.6% Sahar - Zion 112, % 0.0% 0.0% 0.0% % Harel Group 206, , , % 20.4% 23.9% 7.5% 57.5% Clal 125, , , % 19.1% 15.4% -25.9% 66.9% Arieh -7,017 59,833 42, % 4.0% 3.1% -29.0% See note 2 Clal Credit Insurance 2,519 6,099 10, % 0.4% 0.8% 76.3% 326.8% Clal Group 120, , , % 23.5% 19.4% -24.7% 117.2% Eliahu -105, , , % 14.3% 13.4% -14.8% See note 2 Migdal 8,432 70, , % 4.8% 8.4% 60.5% % Hamagen 19,696 56,378 51, % 3.8% 3.8% -9.4% 159.3% Migdal Group 28, , , % 8.6% 12.1% 29.5% 485.0% Ayalon 54,498 92, , % 6.2% 8.1% 18.5% 100.3% IDI Direct 58,450 81, , % 5.5% 8.0% 31.4% 84.3% Menorah 88, , , % 7.9% 7.6% -11.8% 16.4% I.L.D. 9,301 36,654 36, % 2.5% 2.7% 0.7% 296.7% BSSCH 15,516 7,780 16, % 0.5% 1.2% 108.8% 4.7% I.L.D. Group 24,817 44,434 53, % 3.0% 3.9% 19.6% 114.1% AIG 17,920 26,354 26, % 1.8% 2.0% 1.0% 48.5% Shirbit 4,862 14,712 22, % 1.0% 1.7% 55.9% 371.9% Agricultural 20 9,651 15, % 0.7% 1.1% 58.8% Insurance Shomera 1,093 4,268 2, % 0.3% 0.2% -51.9% 87.8% Foreign Trade 2,073 1, % 0.1% 0.1% -28.5% -54.8% Inbal % 0.0% 0.0% 4.8% 9.2% Ezer -11,481 1, % 0.1% 0.0% % Phoenix 52,265 60,533-53, % 4.1% -4.0% % % Hadar 14,329 37,653 35, % 2.5% 2.6% -6.1% 146.7% Phoenix Group 66,594 98,186-18, % 6.6% -1.4% % % TOTAL 557,659 1,482,067 1,354, % 100.0% 100.0% -8.6% 143.0% Division, on the basis of the companies non-consolidated financial statements. 1. The Clal Group Clal, Arieh and Clal Credit Insurance; the Harel Group Harel and Dikla; the Phoenix Group Phoenix and Hadar; the Migdal Group Migdal and Hamagen. Other Shirbit, Shomera and Ezer. 2. This value is meaningless since the company disclosed a loss in 2002 that was followed by a profit in

25 Non-life and Health Insurance In 2004, the Harel Group s profits totalled about NIS 325 million i.e., 17.1% of the total profits in the market. Most of the group s profits were generated in sickness and hospitalization insurance (about NIS 145 million) and in compulsory vehicle insurance (about NIS 105 million). Most of the profits in compulsory vehicle insurance originated in investment profits. The Phoenix Group recorded a sharp drop of 119% in its profits, and closed the year with a loss of about NIS 18.5 million. As stated above, most of the company s losses originated in sickness and hospitalization insurance and in vehicle property insurance. Table D-8 shows that about 63% of all profits in the market were generated in the compulsory vehicle insurance line, which is the largest of the non-life insurance lines in terms of profits. The Clal Group earned 21.5% of this profit, while 20.4% were earned by Eliahu and 16.5% by the Harel Group. Profits in the vehicle property insurance line constitute 13.3% of the total profits in the nonlife insurance market. 19.6% of the profits belong to IDI Direct, while about 16% of the profits belong to the Clal Group. The Phoenix Group is the only group that showed a loss in this line, despite the relatively high investment profits that it reaped. Ten percent of the total profits in non-life insurance are in the sickness and hospitalization insurance line. The business results of this line were affected almost entirely by the results of the Harel and Phoenix groups. Almost all the profits in this line (about NIS 140 million) were generated by the Harel Group. The Phoenix Group recorded the highest losses of all companies in this line (a loss exceeding NIS 80 million). Of all the insurance lines in which the Phoenix Group engaged, the highest loss it suffered was in the sickness and hospitalization insurance line. 25

26 The Capital Market, Insurance and Saving Division Table D-8 Market Share by Profits in Non-Life Insurance Lines by Insurance Groups Final Table Property Loss Comprehensive Residential Mortgage Banks Comprehensive Business Premises Vehicle Compulsory Vehicle Property Employers' Liability Other Liability Lines Clal Group 72.1% 15.6% 56.5% 11.8% 21.5% 15.8% 15.7% -0.2% Personal Accident Sickness and Hospitalization -11.7% Aircraft and Seacraft Cargo in Transit Engineering Insurance Credit Insurance Other Risks 42.4% 30.2% 78.4% 33.7% Harel Group 29.1% 7.3% 7.3% 0.0% 16.5% 5.5% 8.7% 20.3% 159.0% 6.7% 6.9% 0.0% 1.9% Phoenix Group 20.4% 2.1% 1.4% -23.4% 5.5% -9.6% 52.7% 26.9% -92.6% 34.1% 23.8% 0.0% 4.6% Migdal Group -1.4% 8.7% 12.7% 67.9% 11.1% 9.9% 9.7% 11.7% 31.8% 4.3% -3.2% 0.0% 16.0% Menorah -0.2% 18.7% 13.6% 10.1% 3.8% 10.6% 12.0% 14.7% 8.6% 0.1% 27.2% 0.0% 0.8% Ayalon 19.5% 3.8% 0.0% 0.0% 7.9% 11.7% 0.7% 8.6% 4.5% 2.0% 12.1% 0.0% -0.7% I.L.D. Group Eliahu IDI Direct AIG 1.8% 1.3% 0.0% 1.0% 0.1% 9.2% 17.6% 10.7% 0.0% 0.1% 8.3% 0.0% 2.4% 0.0% -4.8% 0.0% 3.9% 20.4% 6.5% 1.1% 4.9% 13.0% 19.6% 12.6% -2.7% -2.7% 0.3% -0.4% -1.0% 12.4% 1.2% -2.4% Since a loss was recorded in this line, -0.2% 0.0% 0.0% -0.1% Since a loss was recorded in this line, -3.8% 14.1% 0.0% 0.0% 2.8% 0.2% 0.0% -0.1% 22.3% 0.0% 0.0% 0.0% 28.1% 0.1% 0.0% 0.0% Agricultural -43.6% 0.0% 0.0% 0.0% 1.8% 4.1% 6.8% 10.4% the figure 0.2% the figure 0.0% -0.8% -0.6% 4.9% Insurance has no has no Shirbit 0.0% 4.6% 0.0% 32.9% 0.0% 1.7% 0.0% -2.0% significance 0.0% significance 0.0% 1.0% 0.0% 8.4% Shomera 0.0% 1.6% 0.0% 3.1% 0.0% 0.2% -0.8% -0.6% 0.3% 0.0% 0.0% 0.0% -0.1% Natural Disasters 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% Ezer 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% -0.7% Foreign Trade Risks 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 1.9% Inbal 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 1.2% Total excl. Avner 43,075 81,036 25,829 20, , ,116 43,297 70,378-22,152 90, ,625 35,104 10,663 50,683 Avner , TOTAL INCLUDING AVNER Market Share by Lines 43,075 81,036 25,829 20,371 1,188, ,116 43,297 70,378-22,152 90, ,625 35,104 10,663 50, % 4.3% 1.4% 1.1% 62.6% 13.3% 2.3% 3.7% -1.2% 4.7% 0.0% 0.6% 1.8% 0.6% 2.7% Division, on the basis of the companies nonconsolidated financial statements. 26

27 Non-life and Health Insurance Text Box A The Reform in the Compulsory Vehicle Insurance Line The average insurance rates in the compulsory vehicle insurance line continued to drop this year as well, and the use of differential rates became more prevalent. These changes are the outcome of the reform instituted in this insurance line in recent years. During this reform, the market was opened to competition. Today, the insurance companies set the insurance rates, based on the recommendations of the database operator 3, and subject to the authorization of the Commissioner of Insurance. In February 2004, the supplementary fee for financing the activities geared to prevent traffic accidents was cancelled. Cancellation of the supplementary fee led to a further 3% reduction in the rate, in the wake of other price reductions of more than 35% since 1998, as shown in Chart D-10. Chart D-10 Cumulative Change in the Average Compulsory Vehicle Insurance Rate for Private Vehicles 100% 95% 90% 85% 80% 75% 70% 65% 60% 55% 50% Dec 97 Jan 98 Sep 98 Jul 99 Sep 00 Apr 01 Jul 03 Nov 03 Feb The database operator is an independent body that collects and analyzes statistical data from the insurance companies and, according to its analysis, recommends a compulsory vehicle insurance rate to them. 27

28 The Capital Market, Insurance and Saving Division In addition to the basic rate, the database operator also recommends coefficients for the parameters being used in pricing each insured s risk. When determining rates, the insurance companies also take into account the characteristics of the vehicle and its drivers. Thus, a differential rate is set, whereby "careful insureds" pay less than "careless insureds." Table D-9 shows the parameters used by each company when they determined the compulsory vehicle insurance rates in December As of November 2004, all insurance companies, without exception, have been using at least one parameter when setting their rates. Table D-9 Use of Parameters in Setting "Compulsory Vehicle Insurance" Rates for Private Vehicles (Correct to ) Engine Capacity Gender of Driver Age of Driver Years Holding Driver's License Prior Claims Driver's License Revocations Air Bags in Vehicle AIG Ayalon Eliahu Arieh Agricultural Insurance Direct Insurance I.L.D. Migdal/ Hamagen Phoenix / Hadar Harel Clal Menorah Shomera Shirbit 28

29 Non-life and Health Insurance Publication of the "Compulsory Vehicle Insurance Calculator 4 "and the improved availability of information to the public have also contributed to promoting competition, reducing rates and expanding the use of differential rates, which take into account a variety of characteristics of both the vehicle and the driver. Table D-10 presents the rates that the insurance companies charged according to various categories of insureds, correct to December 31, Table D-10 Minimum and Maximum Rates in the Privately-Owned Private Vehicle Market (correct to ) Parameters Example Example Example Example Example Example Engine capacity Gender of driver Male Male Female Male Female Female Age of driver Years driving History of accidents History of offenses Air bags Yes Yes No Yes Yes No Minimum rate on market (NIS) Maximum rate on market (NIS) 1,843 1,760 1,706 1,438 1,367 1,367 2,177 2,177 2,177 2,038 1,731 1,763 Difference (in NIS) The calculator may be accessed at 29

30 The Capital Market, Insurance and Saving Division B. Reserves The reserve funds that insurance companies allocate (according to the assessments of the companies actuarial departments) are invested in the capital market, subject to restrictions that the Commissioner of Insurance has prescribed in the investment regulations. Insurance companies profits in the capital market constitute a part of their revenues, and they derive both from the size of the reserves that they allocate and invest in the capital market and from the outcome of their investments. The ratio between the income from investments and the insurance reserves in non-life insurance expresses the yield on the funds retained in reserves in the non-life insurance sector. Due to the size of the reserves, fluctuations in the yields in the capital market have a significant impact on the insurance companies total profits. Table D-11 shows that, in nearly all insurance companies, the total reserves rose from 2003 to On the other hand, the total profits from investments fell by 3% on average in every line, and totalled approximately NIS 1,388 million (excluding Avner and Karnit). The yield on reserves in 2004 was 4.9%, compared to a yield of 8.2% in This drop derives, inter alia, from the moderate rises in the capital market in 2004 compared to 2003, which had been a lucrative year in the Israeli capital market. 30

31 Non-life and Health Insurance Table D-11 Ratio of Income from Investments in Non-Life Insurance Reserves (NIS thousands, percent) Company Income from Investments Insurance Reserves in Non-Life Insurance,Gross Market Share Reserves Ratio of Income from Investments in an Average Reserve AIG 30,639 27, , , % 7.4% 4.9% Ayalon 104,456 90,814 1,775,303 1,975, % 6.6% 4.8% Eliahu 284, ,087 1,663,429 1,741, % 18.9% 6.5% Arieh 115,350 83,350 1,657,231 1,741, % 7.4% 4.9% New BSSCH 2,031 1, ,882 70, % 2.0% 1.7% Agricultural Insurance 40,981 25, , , % 8.2% 4.5% Direct Insurance 61,428 42, ,727 1,060, % 7.5% 4.2% Dikla 76,286 49, , , % 12.0% 6.5% BSSCH 3,481 2,711 21,930 24, % 17.1% 11.7% Hadar 105,676 86,419 1,681,337 1,770, % 6.6% 5.0% I.L.D. 62,430 50,924 1,031,156 1,190, % 6.8% 4.6% Hamagen 60,797 40, , , % 7.4% 4.9% Phoenix 95,470 75,719 2,312,585 2,408, % 4.3% 3.2% Harel 326, ,219 5,089,702 5,602, % 9.9% 3.8% Clal 310, ,414 4,712,982 5,158, % 7.1% 4.5% Clal Credit 2,265 1,440 41,637 44, % 5.4% 3.3% Migdal 141, ,424 2,227,086 2,632, % 6.8% 4.2% Menorah 130, ,697 1,886,264 2,201, % 7.5% 5.5% Ezer 14,557 13, , , % 9.8% 5.9% Inbal 1,279 1,336 52,796 51, % 3.0% 2.6% Natural Disasters Fund 40,594 21, , , % 10.8% 5.6% Shomera 3,286 6, , , % 2.9% 3.3% Shirbit 16,862 17, , , % 6.8% 4.9% Total excluding 2,031,531 1,387,988 28,767,282 31,920, % 7.6% 4.6% Avner & Karnit Avner 564, ,813 5,207,974 4,008, % 6.2% Karnit 272, ,239 2,721,040 2,979, % 6.2% TOTAL INCLUDING AVNER & KARNIT 2,868,675 1,848,040 36,696,296 38,908, % 4.9% Division, on the basis of the companies non-consolidated financial statements. 31

32 The Capital Market, Insurance and Saving Division C. Commissions Another factor affecting the profits in the insurance business is the volume of commissions being paid to insurance agents the insurance companies marketing channels and the volume of the administrative and general expenses expenses that reflect the company s management expenses and overhead, and the degree of its efficiency. Table D-12 presents the ratio of insurance agents commissions to gross premiums, by insurance companies. This table shows that on average, the commissions remained almost without change. As expected, the direct insurance companies are the companies that paid the lowest commissions to agents. The few payments being rendered to agents originate in commercial insurance policies, for example, which were marketed through agents. AIG, Ayalon and the Phoenix are notable, due to the increase in the commission rates that they are paying. The insurance companies whose commission rates were the highest in 2003 (above 18%) Menorah and Shomera despite the fact that they reduced their commission rates, they are paying relative high commissions. This year, too, the Clal Group paid insurance agents the highest total commissions of all insurance companies. However, if one examines the relative percentage of agents commissions in relation to the total premiums, the Clal Group (which collected the highest premiums this year in the non-life insurance lines, about NIS 3.5 billion), is only in fourth place. The major groups Clal, Harel, the Phoenix and Migdal together are paying about NIS 1.3 billion nearly 70% of the commissions to agents in the non-life insurance lines. They hold about 60% of the market share of premiums. Three of these groups reduced the rate of the commissions they are paying to agents. The Phoenix Group, on the other hand, indeed paid less commissions, but the rate of the commission that it paid relative to its gross premiums, rose significantly (from 17.4% to 18.3%) the highest commission rate in the sector. It could be that this is another factor that contributed to the Phoenix Group s losses in

33 Non-life and Health Insurance Table D-12 Ratio of Insurance Agents' Commissions to Gross Premiums (percent) Company Commissions Paid (in NIS thousands) Rate of Commissions from Premiums Rate of Change in Commissions Clal 399, , , % 14.1% 13.9% -3.9% -1.5% Arieh 147, , , % 16.7% 17.5% -5.8% -8.6% Clal Credit Insurance % 0.2% 0.2% -24.0% 2.0% Clal Group 546, , , % 14.5% 14.4% -4.4% -3.4% Harel 132, , , % 14.3% 14.3% 228.5% -1.2% Dikla 5,250 6,935 6, % 2.3% 1.9% 32.1% -1.3% Sahar-Zion 291, % Harel Group 429, , , % 13.2% 13.0% 3.1% -1.2% Phoenix 216, , , % 16.6% 19.8% -1.5% 5.1% Hadar 205, , , % 18.3% 16.6% -6.5% -12.2% Phoenix Group 421, , , % 17.4% 18.3% -3.9% -3.1% Menorah 231, , , % 18.7% 17.0% 9.8% 4.1% Migdal 207, , , % 14.6% 13.9% -5.1% -4.3% Hamagen 61,018 58,389 57, % 14.9% 15.1% -4.3% -1.4% Migdal Group 268, , , % 14.6% 14.2% -4.9% -3.6% Ayalon 132, , , % 11.5% 12.3% 2.4% -2.1% I.L.D. 75,494 99, , % 14.2% 14.3% 31.9% 8.0% Eliahu 93,420 94,773 94, % 11.2% 11.6% 1.4% -0.1% Agricultural Insurance 32,754 46,024 44, % 13.1% 12.0% 40.5% -4.4% Shomera 20,368 33,558 38, % 18.1% 15.7% 64.8% 15.9% Shirbit 19,601 25,714 35, % 8.5% 9.9% 31.2% 37.4% AIG 9,850 13,289 17, % 3.9% 4.4% 34.9% 28.6% IDI Direct 8,535 8,582 6, % 1.3% 1.0% 0.6% -20.1% Inbal % -0.5% 0.0% -37.9% % TOTAL 2,291,342 2,337,679 2,323, % 13.5% 13.4% 2.0% -0.6% Division, on the basis of the companies non-consolidated financial statements. 1. The Clal Group Clal, Arieh and Clal Credit Insurance; the Harel Group Harel and Dikla; the Phoenix Group Phoenix and Hadar; the Migdal Group Migdal and Hamagen. 2. Other Shirbit, Shomera and Ezer. D. General and administrative expenses The general and administrative expenses in an insurance company include all indirect expenses of the insurers, the payments of salaries to the insurers employees, the insurer s holdings of assets and those marketing expenses that cannot be attributed to commissions 33

34 The Capital Market, Insurance and Saving Division being paid to agents. These expenses are likely to give some indication as to the degree of the company s efficiency. The data presented in Table D-13 show that also here, the major groups are leading in the volume of expenses they are incurring. The Harel Group s expenses increased by 4.5% compared to last year, and they are the highest expenses of all the groups. On the other hand, there is almost no change in the total premiums that the Harel Group collected compared to the preceding year. This increase in expenses derived mainly from nearly a 55% rise in the volume of expenses on the part of Dikla, while the premiums that it collected rose only by 16%. The Clal Group also showed an increase in the volume of its expenses, despite a decrease in the total premiums it collected. Of all the companies, Shomera showed the sharpest rise in expenses. The volume of its expenses increased by 61% compared to the preceding year, while its total premiums rose by about 30% during this period. The direct insurance companies and the credit insurance companies are notable for the high ratio between their administrative expenses and the premiums they collected. This ratio does not necessary indicate that these companies are inefficiently run. It could be that it stems from a different expense structure, due to the unique nature of their operations. The credit insurance companies (as well as Menorah), indeed recorded an increase in their administrative expenses this year, but, at the same time, there was a far more significant increase in the total gross premiums they collected. Actually, one may conclude that these companies improved their efficiency. Opposite this, the direct insurance companies, AIG and "Direct Insurance" recorded a sharp rise in expenses, this for the second consecutive year. 34

35 Non-life and Health Insurance Company Table D-13 General and Administrative Expenses in Non-Life Insurance General and Administrative Expenses Rate of Change in Expenses (percent) Ratio of Gen. & Admin. Expenses to Premiums Harel 89, , , % 0.4% 11.5% Dikla 27,752 28,147 43, % 55.1% 12.2% Sahar-Zion 206, % Harel Group 323, , , % 4.5% 11.6% Clal 252, , , % 2.8% 10.2% Arieh 58,026 66,276 66, % -0.1% 9.1% Clal Credit Insurance 15,438 15,947 16, % 3.0% 33.4% Clal Group 326, , , % 2.3% 10.3% Phoenix 127, , , % -0.9% 11.2% Hadar 103, , , % 0.1% 10.7% Phoenix Group 231, , , % -0.5% 10.9% Migdal 128, , , % 2.9% 10.1% Hamagen 47,964 47,055 45, % -3.9% 11.9% Migdal Group 176, , , % 1.1% 10.5% IDI Direct 108, , , % 15.8% 22.0% Menorah 107, , , % 2.7% 8.6% Ayalon 94, , , % 5.3% 9.9% I.L.D. 58,657 64,936 72, % 12.1% 9.7% BSSCH 20,082 21,979 22, % 0.9% 34.1% I.L.D. Group 78,739 86,915 94, % 9.3% 11.6% AIG 68,484 78,067 89, % 15.1% 23.0% Eliahu 82,059 77,342 76, % -1.5% 9.4% Shirbit 31,039 32,285 38, % 19.3% 10.7% Avner 35,878 30,805 24, % -21.2% Shemora 7,863 14,998 24, % 61.2% 9.8% Agricultural Insurance 19,851 21,058 22, % 5.5% 6.1% Natural Disasters 17,660 19,332 21, % 12.8% 14.2% Karnit 16,155 14,889 15, % 6.5% 8.3% Ezer 15,592 16,646 13, % -18.8% 15.3% Foreign Trade 9,585 9,246 8, % -5.1% 17.0% Inbal % 10.5% 0.1% TOTAL 1,750,596 1,909,148 1,993, % 4.4% 11.3% Division, on the basis of the companies non-consolidated financial statements. 1. The Clal Group Clal, Arieh and Clal Credit Insurance; the Harel Group Harel and Dikla; the Phoenix Group Phoenix and Hadar; the Migdal Group Migdal and Hamagen. 2. Other Shirbit, Shomera and Ezer. 35

36 The Capital Market, Insurance and Saving Division Examination of the general and administrative expenses in relation to net premiums is also likely to give some indication as to a company s degree of efficiency. Increasing premiums, while sustaining the same level of administrative expenses, would lead to a reduction in the ratio being measured, and is likely to indicate that the company is being efficiently managed. By examining the data in Chart D-11, one can see that during the years 2000 through 2002, a decrease in the ratio of general and administrative expenses to net premiums was recorded. This decrease indicates efficiency and streamlining of the volume of costs. However, in the past two years, a rise in this ratio has actually been recorded. Compared to 2003, the net premiums increased by about 2% in the non-life insurance lines, while the general and administrative expenses rose at the rate of about 5%, which receives expression as a higher ratio. Chart D-11 Ratio of General and Administrative Expenses to Net Premiums 20.0% 15.0% 10.0% 5.0% 0.0% Division, on the basis of the companies consolidated financial statements. 36

37 Non-life and Health Insurance 4. Business Results in Health Insurance A. General The growth trend in the private health insurance market began, inter alia, following the legislation of the State Health Insurance Law in This trend led to the creation of a wide variety of products in the health insurance field. This field has increasingly developed over the years, particularly during recent years, both in terms of the variety of products and in terms of the total premiums being paid in this field. The activity in the health field is reported under non-life insurance (sickness and hospitalization line), and under life insurance. For example: the majority of the activity in the medical expenses sub-line is reported under non-life insurance; while the majority of the activity in the work disability sub-line is reported under life insurance. In this section, we will present the business results in health insurance for 2004 according to the results in the sickness and hospitalization insurance line, as reported under non-life insurance, and the results of a few sub-lines in health insurance, as reported under non-life insurance and under life insurance. B. The sickness and hospitalization insurance line activities in the health field being reported under non-life insurance The volume of activities in the sickness and hospitalization insurance line in 2004 reflects an ongoing growth trend. Chart D-12 shows an increase in the parameters in this line, with the exception of profits. Thus, the total premiums in 2004 totalled about NIS 1,807 million; i.e., growth of 12.5% over the corresponding period last year. As for the profits of the insurance companies, on the other hand, profits dropped 28.6% compared to the previous year NIS 90 million in 2004, compared to NIS 127 million in This decline in profitability derives mainly from a decline at a similar rate in the investment profits in

38 The Capital Market, Insurance and Saving Division Chart D-12 Business Results in the"sickness and Hospitalization" Line, (NIS millions, December 31st 2004 prices) 1,800 1,600 1,400 1,200 1, Premiums Claims Expenses* Profits Division, on the basis of the companies consolidated financial statements. * The expenses include commissions and administrative expenses. The loss ratio the loss ratio is the ratio between gross claims (claims paid and changes in pending claims) and the premiums earned. The loss ratio in the sickness and hospitalization insurance line in 2004 showed nearly no change compared to 2003, and stands at about 63%. Market shares in the sickness and hospitalization insurance line Chart D-13 presents the distribution of gross premiums in the sickness and hospitalization insurance line in 2004, by insurance companies. Chart D-14 presents the distribution of premiums for each insurance company for the years 2001 through Approximately 48% of the premiums originated in the Harel Group, while the rest of the premiums concentrated mainly in the Clal Group, the Phoenix Group, the Migdal Group and in Menorah. Comparing these figures with the results obtained in 2003 shows that, in 2004, the Harel Group s market share in this line increased by 5%, while, on the other hand, the market shares of the Clal Group and the Phoenix Group decreased by about 3%. 38

39 Non-life and Health Insurance Chart D-13 Distribution of Gross Premiums by Companies in the "Sickness and Hospitalization" Line in 2004 (percent) Phoenix Group 13% menorah 10% Other 2% Clal Group 16% Migdal Group 11% Harel Group 48% Division, on the basis of the companies consolidated financial statements. 1. The Harel Group Harel and Dikla 2. The Phoenix Group Phoenix and Hadar 3. The Clal Group Clal and Arieh 4. The Migdal Group Migdal and Hamagen. 5. Other Ayalon, AIG, Direct Insurance, Agricultural Insurance, Shirbit, Shomera and I.L.D. Insurance Company. Chart D-14 Distribution of Gross Premiums by Companies in the "Sickness and Hospitalization" Line, (percent) 50% 40% 30% 20% 10% 0% Harel Group Clal Group Phoenix Group Migdal Group Menorah Others Division, on the basis of the companies consolidated financial statements

40 The Capital Market, Insurance and Saving Division C. Distribution by sub-lines activities in the health field being reported under non-life insurance and under life insurance In 2004, the total gross premiums in health insurance rose by 14.3% compared to the preceding year NIS 4.2 billion in 2004, compared to NIS 3.7 billion in Chart D-15 presents the distribution of gross premiums by sub-lines in the health field during Thirty percent of the premiums were in the work disability sub-line, 22% of the premiums were in the medical expenses sub-line, 17% of the premiums were in the longterm care sub-line 3 and the remainder was divided among the rest of the various health sublines. There was no real change in the distribution by sub-lines in 2004, compared to Chart D-15 Distribution of Gross Premiums by Health Insurance Sub-lines in 2004 (percent) Disabilities 5% Dental 7% Travel Abroad 6% Others 3% Medical Expenses 22% Foriegn Workers 2% Critical Illnesses 8% Work Disability 30% Long-term Care 17% Division, on the basis of the companies non-consolidated financial statements. Medical expenses insurance to cover medical expenses, among them surgery, transplants, special treatments abroad, medical examinations, consultations and pharmaceuticals. Table D-14 and Table D-15 present data on collective insurance and on private insurance by main health insurance sub-lines in Correct to year-end 2004, there are approximately three million insureds under collective long-term care insurance, compared to about 200,000 insureds under private insurance. There has been a 4.5% increase in the total number of insureds under long-term care insurance compared to the preceding year about 3.2 million insureds in 2004, compared to about 3 million insureds in

41 Non-life and Health Insurance Table D-14 Data on Collective Insurance for 2004 (NIS thousands, December 31st 2004 prices) Medical Expenses Critical Illnesses Long-term Care Total gross premiums 303,500 25, ,321 After deducting reinsurance 38, ,728 Total premiums in retention 265,376 25, ,593 Claims 229,902 24, ,969 After deducting reinsurance 22, ,963 Total claims in retention 207,732 24, ,006 Direct commission fees 43,423 1,581 24,905 Division, on the basis of the companies non-consolidated financial statements. Table D-15 Data on Private Insurance for 2004 (NIS thousands, December 31st 2004 prices) Medical Expenses Critical Illnesses Longterm Care Insurance Foreign Workers Work Disability Disabilities Travel Abroad Total gross premiums 603, , ,635 95,696 1,192, , ,851 After deducting 154,748 79,600 26, ,394 24,910 12,724 reinsurance Total premiums 449, , ,618 95, , , ,127 in retention Claims 223, ,675 43,668 40, ,187 91,911 77,711 After deducting 62,805 55,218 19, ,707 15,575 1,546 reinsurance Total claims in retention 160, ,457 23,765 40, ,480 76,337 76,165 Direct commission fees 179,730 77,632 68,514 32, ,739 27,038 92,119 Division, on the basis of the companies non-consolidated financial statements. 41

42 The Capital Market, Insurance and Saving Division Chart D-16 and Chart D-17 present the loss ratios in collective insurance and in private insurance by main health insurance sub-lines in Chart D-16 shows that the highest loss ratio is in the sickness and hospitalization insurance sub-line, which reached 99% this year, compared to 105% in Chart D-17 shows that the loss ratio is lower in private insurance than in collective insurance. The highest loss ratio in private insurance reached 80% in 2004, compared to 70% in Usually, the lower the loss ratio, the higher the insurance company s profitability. Chart D-16 Loss Ratio in Collective Insurance by Main Health Insurance Sub-lines in 2004 (percent) 100% 80% 76% 99% 87% 70% 60% 40% 20% 0% Medical Expenses Critical Illnesses Dental Travel Abroad Division, on the basis of the companies non-consolidated financial statements. Chart D-17 Loss Ratio in Private Insurance by Main Health Insurance Sub-lines in 2004 (percent) 80% 80% 57% 60% 40% 38% 44% 34% 20% 0% Medical Expenses Foreign Workers Critical Illnesses Dental Travel Abroad Division, on the basis of the companies non-consolidated financial statements. 42

43 Non-life and Health Insurance Chart D-18 presents the ratio of direct commissions to gross premiums in collective insurance and in private insurance in three health insurance sub-lines in The chart clearly shows that this ratio is substantially higher in private insurance than in collective insurance. The main reasons why the commissions in collective insurance are lower than the commissions in private insurance are (1) the insurance is provided for a group of insureds that usually has bargaining power against the insurance company, (2) a commission is not paid for each separate policy and (3) the marketing and distribution costs are lower. The most significant change compared to 2003 is in the travel abroad insurance sub-line. The ratio of direct commissions to gross premiums rose in the travel abroad sub-line by 16% in collective insurance and by 10% in private insurance. Chart D-18 Ratio of Direct Commissions to Gross Premiums by Main Health Insurance Sub-Lines in 2004 (percent) 39% 40% 30% 30% 25% 23% 20% 14% 10% 6% 0% Medical Expenses Critical Illnesses Travel Abroad Private Collective Division, on the basis of the companies non-consolidated financial statements. Table D-16 presents the gross premiums in main health insurance sub-lines in 2003 and 2004, broken down according to private insurance, collective insurance and total premiums. The total premiums are also presented in Chart D-19: the premiums rose in 2004 compared to 2003 in each of the sub-lines, both in private insurance and in collective insurance. 43

44 The Capital Market, Insurance and Saving Division או הו מ סי נכ Table D-16 Gross Premiums by Health Insurance Sub-lines, (NIS thousands, December 31st 2004 prices, percent) Private Collective Total Rate of change % % Work disability 1,063,040 1,192, % 66,554 71, % 1,129,594 1,263, % Medical expenses 552, , % 265, , % 818, , % Critical illnesses 265, , % 21,254 25, % 286, , % Long-term care 179, , % 360, , % 540, , % Disabilities 179, , % 12,960 14, % 192, , % Division, on the basis of the companies non-consolidated financial statements. Chart D-19 Total Gross Premiums by Health Insurance Sub-Lines, (NIS Millions, December 31st 2004 prices) 1,500 1, Medical Expenses Critical Illnesses Long-term Care Work Disability Disabilities Division, on the basis of the companies non-consolidated financial statements. 44

45 Non-life and Health Insurance As a continuation of the data presented above regarding gross premiums by health insurance sub-lines, Table D-17, Table D-18 and Charts D-20 through D-29 present the distribution of gross premiums by insurance companies in a number of health insurance sub-lines in 2004 (the charts also present data for 2003), broken down according to private insurance and collective insurance. These tables and charts present the market shares of the insurance companies in the main health insurance sub-lines. The sub-lines having relatively high market concentration are (1) private travel abroad insurance, (2) collective long-term care insurance and (3) collective dental insurance. In all other sub-lines, the premiums are dispersed among the companies. Table D-17 Gross Premiums in Insurance Companies by Private Health Insurance Sub-lines in 2004 (NIS thousands, December 31st 2004 prices, percent) Medical Expenses* % Foreign Workers % Critical Illnesses % AIG 0 0% 0 0% 195 0% 497 0% 0 0% 0 0% 0 0% Ayaon 7,306 1% 4,286 4% 4,085 1% 0 0% 3,690 1% 22,619 2% 2,751 1% Eliahu 1,746 0% 0 0% 1,797 1% 0 0% 14,557 5% 5,195 0% 1,795 1% Agricultural Insurance 0 0% 0 0% 0 0% 0 0% 0 0% 0 0% 0 0% I.L.D % 489 1% 4,893 2% 123 0% 0 0% 16,283 1% 3,047 2% Menorah 103,928 17% 42,542 44% 50,354 16% 4,691 2% 25,913 10% 135,921 11% 29,685 15% Shomera 1,330 0% 0 0% 0 0% 0 0% 0 0% 0 0% 0 0% Shirbit 1,482 0% 0 0% 0 0% 16,419 7% 0 0% 0 0% 0 0% Harel Group 137,876 23% 37,894 40% 42,550 14% 101,681 43% 56,986 21% 212,936 18% 21,764 11% Clal Group 79,791 13% 8,617 9% 60,714 20% 109,899 46% 40,628 15% 258,125 22% 32,963 17% Migdal Group 118,792 20% 0 0% 102,009 33% 3,107 1% 63,258 23% 371,573 31% 68,279 35% Phoenix Group 151,224 25% 1,868 2% 44,033 14% 1,434 1% 64,603 24% 170,083 14% 32,488 17% 603,817 95, , , ,635 1,192, ,772 Travel Abroad % Long-term Care % Work Disability % Disabilities % Division, on the basis of the companies non-consolidated financial statements. 45

46 The Capital Market, Insurance and Saving Division Chart D-20 Private Insurance - Distribution of Gross Premiums in the "Medical Expenses" Sub- Line by Insurance Companies in 2004 (percent) Chart D-21 Private Insurance - Distribution of Gross Premiums in the "Medical Expenses" Sub- Line by Insurance Companies in 2003 (percent) Phoenix Group 25% Others 2% Menorah 17% Harel Group 23% Phoenix Group 24% Others 2% Menorah 18% Harel Group 23% Migdal Group 20% Clal Group 13% Migdal Group 20% Clal Group 13% Total Gross Premiums - NIS 603,817 thousand Total Gross Premiums - NIS 552,463 thousand Source: Data from the annual reports of the insurance companies processed by the Capital Market, Insurance and Savings Division, on the basis of the companies non-consolidated financial statements. Source: Data from the annual reports of the insurance companies processed by the Capital Market, Insurance and Savings Division, on the basis of the companies non-consolidated financial statements. Chart D-22 Private Insurance - Distribution of Gross Premiums in the "Critical Illnesses" Subline by Insurance Companies in 2004 (percent) Chart D-23 Private Insurance - Distribution of Gross Premiums in the "Critical Illnesses" Subline by Insurance Companies in 2003 (percent) Phoenix Group 14% Others 4% Menorah 16% Harel Group 14% Phoenix Group 13% Others 6% Menorah 10% Harel Group 12% Clal Group 20% Migdal Group 32% Clal Group 20% Migdal Group 39% Total Gross Premiums - NIS 310,630 thousand Total Gross Premiums - NIS 265,176 thousand Source: Data from the annual reports of the insurance companies processed by the Capital Market, Insurance and Savings Division, on the basis of the companies non-consolidated financial statements. Source: Data from the annual reports of the insurance companies processed by the Capital Market, Insurance and Savings Division, on the basis of the companies non-consolidated financial statements. 46

47 Non-life and Health Insurance Chart D-24 Private Insurance - Distribution of Gross Premiums in the "Long-term Care" Subline by Insurance Companies in 2004 (percent) Chart D-25 Private Insurance - Distribution of Gross Premiums in the "Long-term Care" Subline by Insurance Companies in 2003 (percent) Phoenix Group 25% Others 1% Eliahu 5% Menorah 10% Harel Group 21% Phoenix Group 25% Others 2% Eliahu 8% Menorah 6% Harel Group 21% Migdal Group 23% Clal Group 15% Migdal Group 22% Clal Group 16% Total Gross Premiums - NIS 269,635 thousand Total Gross Premiums - NIS 179,524 thousand Source: Data from the annual reports of the insurance companies processed by the Capital Market, Insurance and Savings Division, on the basis of the companies non-consolidated financial statements Source: Data from the annual reports of the insurance companies processed by the Capital Market, Insurance and Savings Division, on the basis of the companies non-consolidated financial statements Table D-18 Gross Premiums in Insurance Companies by Collective Health Insurance Sub-lines in 2004 (NIS thousands, December 31st 2004 prices, percent) Medical Critical Long-term % % Expenses Illnesses Care % AIG 0 0% 0 0% 0 0% Ayalon 6,280 2% 2,067 8% 1,345 0% Eliahu 5 0% 0 0% 15 0% Agricultural Insurance 898 0% 0 0% 0 0% I.L.D. 0 0% 0 0% 6,524 1% Menorah 13,840 5% 922 4% 156 0% Shomera 0 0% 0 0% 0 0% Shirbit 0 0% 0 0% 0 0% Harel Group 126,800 42% 6,118 24% 271,516 62% Clal Group 35,531 12% 7,038 28% 27,126 6% Migdal Group 45,616 15% 8,889 35% 24,795 6% Phoenix Group 74,530 25% 130 1% 106,844 24% 303,500 25, ,321 Division, on the basis of the companies non-consolidated financial statements. 47

48 The Capital Market, Insurance and Saving Division Chart D-26 Collective Insurance - Distribution of Gross Premiums in the "Medical Expenses" Subline by Insurance Companies in 2004 (percent) Chart D-27 Collective Insurance - Distribution of Gross Premiums in the "Medical Expenses" Sub-Line by Insurance Companies in 2003 (percent) Phoenix Group 25% Others 2% Menorah 5% Harel Group 41% Phoenix Group 23% Others 1% Harel Group 49% Migdal Group 15% Clal Group 12% Total Gross Premiums - NIS 303,500 thousand Migdal Group 17% Clal Group 10% Total Gross Premiums - NIS 265,925 thousand Source: Data from the annual reports of the insurance companies processed by the Capital Market, Insurance and Savings Division, on the basis of the companies non-consolidated financial statements. Source: Data from the annual reports of the insurance companies processed by the Capital Market, Insurance and Savings Division, on the basis of the companies non-consolidated financial statements. Chart D-28 Collective Insurance - Distribution of Gross Premiums in the "Long-term Care" Sub-line by Insurance Companies in 2004 (percent) Chart D-29 Collective Insurance - Distribution of Gross Premiums n the "Long-term Care" Sub-line by Insurance Companies in 2003 (percent) Phoenix Group 24% Others 2% Phoenix Group 35% Others 2% Harel Group 52% Migdal Group 6% Clal Group 6% Harel Group 62% Total Gross Premiums - NIS 438,321 thousand Migdal Group 6% Clal Group 5% Total Gross Premiums - NIS 360,616 thousand Source: Data from the annual reports of the insurance companies processed by the Capital Market, Insurance and Savings Division, on the basis of the companies non-consolidated financial statements. Source: Data from the annual reports of the insurance companies processed by the Capital Market, Insurance and Savings Division, on the basis of the companies non-consolidated financial statements. 48

49 Non-life and Health Insurance 5. Stability and Assessment of Risks A. Quality of the assets Indices based on data about the composition of the assets indicate the risk exposure in the asset portfolio. On the one hand, the more liquid the company s assets, the more the company is able to assess its assets properly and realize them, should it be forced to fulfill its shortterm liabilities and contend with unforeseen situations. On the other hand, if the total assets contain a large share of securities, this can expose the company to capital market risks and to greater sensitivity to a recession. A higher risk embodies at the same time, also a chance for a higher yield on the assets. Chart D-30 and Table D-19 show that there has been a slight increase in the securities component of the total assets in recent years. At the same time, as Table D-20 shows, there has been a slight decrease in the fixed assets component, in investments in held companies and in receivables components of the total assets. Both these data reflect a rise in the insurance companies liquidity. The increase in investments in securities can be attributed both to the policy of the Commissioner of Insurance, which made it easier for insurance companies to invest in securities, and to the more vibrant activity of the stock exchange, which encouraged companies to invest in this channel in order to achieve higher yields. Chart D-30 Ratio of Negotiable Securities to Total Assets and Debit Balances 33.0% 32.0% 31.0% 30.0% 29.0% 28.0% 27.0% Division, on the basis of the companies consolidated financial statements. 49

50 The Capital Market, Insurance and Saving Division Table D-19 Ratio of Securities (excluding in Held Companies) to Total Assets and Debit Balances Total Consolidated 33.6% 30.5% 31.8% 37.9% 38.7% Division, on the basis of the companies consolidated financial statements. Table D-20 Ratio of Fixed Assets, Receivables, Investment in Held Companies to Total Assets and Debit Balances Total Consolidated 30.4% 32.7% 32.6% 31.7% 31.3% Division, on the basis of the companies consolidated financial statements. B. Reinsurance Insurance companies in Israel customarily purchase reinsurance from foreign companies in order to mitigate the risk to which they are exposed. When purchasing reinsurance, the insurance company transfers a portion of the premiums it collected from its insureds to the reinsurer. In exchange, the reinsurer participates in claims payments, and thus, assumes a portion of the risk to which the insurance company had been exposed. One of the considerations, when determining the scope of the reinsurance needed, is the experience and the expertise of the company in a particular field. The more that a company focuses its business on a particular line, the more experience it usually has in pricing its risks. Because of its own experience, it can afford to use less reinsurance than companies lacking such experience. One of the ways to examine the reinsurance policy of an insurance company is to examine the volume of premiums that are retained by the insurance company and not transferred to the reinsurers the retained premiums. The larger the retained premiums, the greater the share of the risk being retained by the insurance company. In recent years, the insurance companies have been reducing the volume of premiums that 50

51 Non-life and Health Insurance they have been transferring to reinsurers. As Chart D-31 shows, this trend is continuing this year as well. This reduction in the volume of premiums being transferred to reinsurers (a rise in premiums in retention relative to the gross premiums) means that the insurance companies exposure to risks increases. Chart D-31 Ratio of Retained Premiums to Gross Premiums 78.0% 76.0% 74.0% 72.0% 70.0% 68.0% 66.0% Compared to previous years, there have been no significant changes in the volume of reinsurance in the various lines. The data in Table D-21 show that there are significant differences between the lines and between the companies in the ratio of premiums in retention to the gross premiums. In the vehicle insurance lines (compulsory and property), nearly all the premiums (about 95%) are retained. The minor use of reinsurers in these insurance lines derives from the vast experience that the companies have, and from the large volume of insureds, which facilitates a better risk dispersion. In the compulsory vehicle insurance line, the I.L.D. Insurance Company is notable for its low ratio of premiums in retention to gross premiums, compared to what is customary in the line. In the sickness and hospitalization insurance line and in the employers liability insurance line, the insurance companies are also transferring a relatively small portion of their premiums to reinsurers. In credit insurance, the premiums in retention rose from 29% in 2003 to 41% in 2004, but this year too, the ratio of premiums in retention in this line is the lowest of the various non-life insurance lines. 51

52 The Capital Market, Insurance and Saving Division Table D-21 Ratio of Retained Premiums (After Payment to Reinsurers) to Gross Premiums in 2004 Company Property Loss Comprehensive Residen-tial Mortgage Banks Comprehensive Business Premises Vehicle Compulsory Vehicle Property Employers> Liability Other Liability Lines Personal Accident Sickness & Hospitalization Aircraft and seacraft Cargo in Transit Engineering Insurance Credit Insurance Other Risks TOTAL AIG 1% 84% 99% 100% 11% 9% 97% 100% 1% 94% 81% Ayalon 74% 86% 95% 100% 92% 84% 45% 98% 32% 21% 92% 91% Eliahu 34% 81% 32% 96% 100% 90% 79% 41% 30% 37% 27% 93% Arieh 27% 63% 37% 95% 53% 87% 77% 24% 81% 92% 33% 21% 62% BSSCH Company 39% 38% 38% Agricultural Insurance 7% 96% 83% 85% 32% 84% 5% 5% 26% 81% 54% Dikla 81% 84% 57% 83% Hadar 20% 66% 1% 60% 98% 100% 90% 78% 39% 68% 6% 19% 19% 83% 82% I.L.D. 18% 38% 59% 68% 93% 87% 80% 85% 100% 49% 38% 21% Hamagen 16% 62% 31% 98% 100% 97% 91% 90% 93% -2% 33% 37% 36% 81% Phoenix 18% 66% 0% 60% 98% 100% 89% 76% 41% 76% 8% 19% 18% 85% 81% IDI Direct 74% 40% 93% 95% 100% 70% 98% 84% 95% Clal Credit 43% 43% 43% Clal Insurance 18% 72% 41% 66% 96% 100% 77% 35% 89% 80% 32% 27% 24% 95% 70% Migdal 66% 61% 13% 98% 100% 95% 65% 78% 90% 6% 25% 38% 17% 69% Menorah 18% 76% 53% 54% 98% 79% 95% 68% 69% 73% 35% 20% 42% 56% 76% Natural Disasters 92% 92% Foreign Trade Risks 19% 19% Ezer 99% 99% Shomera 62% 46% 93% 87% 71% 82% 40% 43% 19% 85% Shirbit 61% 64% 96% 99% 88% 86% 82% 46% 38% 96% 94% Harel 15% 53% 35% 98% 95% 56% 17% 43% 96% 30% 20% 19% 100% 69% Average by Line 22% 67% 42% 35% 95% 94% 83% 46% 72% 86% 24% 25% 24% 41% 69% 76% Division, on the basis of the companies consolidated financial statements. 52

53 Non-life and Health Insurance C. Loss ratio The loss ratio is the ratio between the claims that the insurance companies paid to insureds and the premiums that the insureds paid. An insurance company determines the insurance premium according to an assessment of the anticipated loss, and adds to it a level of expenses (according to the costs for reinsurance, agents commissions, fees and levies, general and administrative expenses) and the desired profit. The loss ratio enables the underwriting results to be examined after neutralizing the investment profits associated with the insurance activity. This comparison is mainly suitable for the property insurance lines, since in these lines the claims being paid during the year are mainly claims in respect of the last underwriting year. The year 2004 showed a mixed trend in the average loss ratio in the non-life insurance lines, as can be seen in Table D-22. In the personal accident insurance line, a few of the companies loss ratios are higher than 100%. These companies are usually also the companies who showed losses in the line. Thus, for example, AIG s loss ratio, which lost about NIS 19 million in this line, is 121.1%. There are lines whose loss ratio is lower, such as in building insurance for mortgages, while, on the other hand, there are lines whose loss ratio is routinely high, such as in the various liability insurance lines. 53

54 The Capital Market, Insurance and Saving Division Company Table D-22 Gross Loss Ratio by Lines and Companies, (percent) Property Loss Comprehensive Residen-tial Apartment Insurance at Mortage Banks Comprehensive Business Premises Vehicle Property Personal Accident Sickness & Hospitalization Aircraft & Seacraft Cargo in Transit Engineering Insurance Credit Insurance IDI 37.6% 14.5% 110.9% 66.8% 55.4% AIG 13.2% 35.8% 55.1% 121.1% 124.1% 51.7% Ayalon 37.6% 51.2% 71.0% 38.1% 66.3% 32.3% 51.7% Eliahu 39.0% 45.0% 13.4% 69.8% 58.8% 26.9% 42.7% Arieh 25.2% 46.5% 16.8% 75.5% 39.3% 54.3% 201.3% 17.8% 20.9% New BSSCH 38.3% Agricultural Insurance 94.5% 75.5% 78.6% 6.6% 107.6% -57.5% Dikla 17.5% 72.1% BSSCH Hadar 49.1% 59.9% 75.6% 78.0% 58.4% 40.5% 79.6% 46.4% 27.0% I.L.D. 36.7% 33.1% 50.8% 70.3% 39.4% 98.8% 55.1% 59.2% Hamagen 6.7% 39.1% 14.4% 63.0% 180.3% 15.4% 42.5% 37.2% 104.9% Phoenix 13.2% 48.2% 18.8% 65.3% 77.9% 37.1% 81.5% -32.3% 23.8% 18.8% Clal 79.9% 51.5% 15.9% 65.1% 70.6% 113.6% 78.1% -50.9% 46.0% 67.8% Migdal 54.5% 14.5% 39.5% 68.3% 75.6% 56.0% 96.1% 55.4% 109.4% Menorah 34.6% 52.2% 14.0% 53.6% 71.3% 74.8% 51.5% 98.4% 53.8% 25.0% Shomera 51.7% 46.0% 71.3% 102.3% 41.6% Shirbit 42.1% 40.0% 79.4% 22.7% 80.4% 63.5% 6.1% Harel 24.1% 49.6% 15.0% 75.0% 70.6% 58.2% 63.4% 30.7% 45.0% Calculation by Line 2004 Calculation by Line 2003 Calculation by Line % 49.0% 15.5% 48.2% 72.0% 74.6% 63.4% 64.1% 42.1% 48.8% 29.1% 41.9% 50.8% 13.7% 67.6% 75.2% 73.7% 62.9% 69.9% 78.1% 38.3% 36.1% 38.1% 49.4% 15.2% 53.7% 69.5% 87.5% 59.3% 87.8% 33.8% 38.1% 13.7% Division, on the basis of the companies consolidated financial statements. D. Liquidity risks A comparison between a company s current assets and its current liabilities shows the company s ability to meet its short-term liabilities. A high ratio indicates solvency and balance between the company s assets and its liabilities. Chart D-32 shows that the growth trend 54

55 Non-life and Health Insurance in the ratio of cash/cash equivalents and negotiable assets to current liabilities is continuing this year, too. Chart D-32 Ratio of Cash/Cash Equivalents and Negotiable Assets to Current Liabilities 54.0% 52.0% 50.0% 48.0% 46.0% 44.0% 42.0% E. Insurance Risk Insurance companies allocate funds to reserves according to the assessments of the companies actuarial departments regarding future risks. Chart D-33 shows the companies reserves in relation to the average claims in retention during the previous three years (after deducting claims paid by reinsurers). The use of an average of three years prevents deviations in the ratio due to exceptional claims in any given year. A steady rise in the ratio between the reserves and the average claims is quite evident. This rise is likely to indicate the company s improved ability to handle claims filed against it. Chart D-33 Ratio of Reserves to Average Claims in Retention